It was a month of 2 halves. Global Markets continue to be extremely volatile. The strong rally off the June lows continued for the first half of the month, driven by relief that Q2 earnings were not as bad as many feared, a more measured tone from Fed Chairman Powell, signs inflation was peaking (CPI report, collapsing US gasoline prices) and positioning (the pain trade was,and remains, higher). The rally then ran out of steam, given the speed and size of the move higher, a pullback of some sort was inevitable. But peak illiquidity (late August), concerns of a bleak winter in Europe as gas prices went parabolic –which turned ECB commentary hawkish (just as prices peaked, at least in the short term), and renewed hawkishness from Powell at Jackson Hole, exacerbated the move lower.
US yields have moved higher again, the market was surprised by Powell’s Jackson Hole comments, which were somewhat inconsistent with his comments at July’s Fed meeting. He emphasised the risks from prematurely loosening policy and stated that restoring price stability may require keeping policy restrictive for some time. It appears that the Fed is once again behind the curve in a big way, in a mirror image to this time last year, when Fed officials were at pains not to appear hawkish when inflation threats were rising rapidly, we now have a Fed falling over themselves to sound as hawkish as possible, as inflation is easing (albeit from a high level). At June’s Fed meeting Powell pointed out that they’re not really interested anymore in making a distinction between headline and core inflation,for consumers, the logic being that it’s not much comfort if core measures are cooling but gasoline prices remain very high. Well, US gasoline futures ended the month down ~45% from their June highs, ~15% below pre-invasion levels (prices at the pump follow with a lag). Another concern was inflation expectations becoming unanchored, expectations being heavily influenced by the price at the pump, and at the same time Powell was speaking we saw the University of Michigan inflation expectations ease.